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									                                                      Foreign direct investment in China




11

Foreign direct investment in China
Trends and characterstcs after WTo accesson



Chunlai Chen



Foregn drect nvestment (Fdi) n chna has been one of the most sgnficant
features of the country’s economc reform and openng up to the outsde world.
The gradual lberalsaton of restrctons on Fdi snce 1979 and the government’s
commtment to further openng up have greatly mproved the nvestment
envronment. Foregn firms have been attracted by the huge domestc market
and pool of relatvely well-educated, low-cost labour, whch has made chna
one of the most attractve destnatons for Fdi n the world.
    chna became a member of the World Trade organzaton (WTo) n
december 2001, after 15 years of negotatons n whch chna agreed to reduce
tarff and non-tarff barrers to trade n agrculture and manufactured goods, to
lberalse and open trade n servces to foregn partcpaton, remove restrctons
on Fdi—partcularly n servces—and mprove protecton of ntellectual
property rghts. in terms of Fdi, chna has made substantal commtments n
nvestment lberalsaton, especally n the servces sector, and has agreed to
comprehensvely mplement the Trade-related investment measures (Trims)
agreement. Undoubtedly, the reducton n foregn nvestment barrers and the
lberalsaton of the Fdi regme wll provde great opportuntes for foregn
nvestors to operate n chna.
    There have been many studes on the mpact of chna’s entry nto the WTo
on Fdi nflows nto the country (for example, mckbbn and Wlcoxen 1998; hu
1999; Walmsley and hertel 2000; UNcTAd 2000; chen 2002). The most common
findngs are that chna’s WTo accesson wll have a postve mpact on ts gross
domestc product (GdP) growth—manly through efficency gans resultng

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China—Linking Markets for Growth


from trade and nvestment lberalsaton—and t wll accelerate Fdi nflows nto
chna and ncrease the share of foregn ownershp n chna’s assets.
   What, however, has really happened wth Fdi nflows snce chna’s WTo
accesson? Ths chapter ntends to provde a bref overvew of the trends and
characterstcs of Fdi nflows nto chna snce ts WTo accesson by analysng
aspects of the general trend of Fdi nflows, the composton of Fdi sources,
the sectoral and regonal dstrbuton of Fdi nflows and the structure of Fdi
n chna’s manufacturng.

The general trend of FDI inflows into China
Fdi nflows nto chna presented three dstnct phases (see Fgure 11.1): the
expermental phase from 1979 to 1991, the boom phase from 1992 to 2001, and
the post-WTo phase from 2002 to 2006.
    durng the expermental phase, Fdi nflows were low, but they grew
steadly. The perod was charactersed by small nvestment projects, hgh
nvestment costs, restrctve prce controls, poor nfrastructure and lack of
legal frameworks.
    in the second phase, Fdi nflows ntally ncreased very rapdly, however,
they slowed after 1997 and declned n 1999 and 2000, followed by a moderate
recovery n 2001. The slow-down from 1997 to 2000 could be explaned by
several factors. Frst, there has been a slow-down from the surge n transfers
of labour-ntensve actvtes from neghbourng Asan economes. in addton,
the east Asan financal crss weakened substantally the outward nvestment
abltes of east and southeast Asan economes. As a result, Fdi flows nto
chna from east and southeast Asa declned substantally snce 1997. second,
market rates of return to nvestment n chna have not been as hgh as foregn
nvestors expected. informal relatonshps and corrupton stll hnder many
busness transactons by foregners. in addton, neffcent state-owned
enterprses contnue to domnate many key sectors of the economy, especally
the servces sector. Thrd, there stll are restrctons on Fdi, such as on
ownershp shares, modes of Fdi entry, busness operatons and regonal and
sectoral restrctons.
    Therefore, chna’s accesson to the WTo came at a crtcal tme, when the
country was facng dfficultes sustanng a hgh level of Fdi nflows. could
chna’s WTo accesson revve the trend of ncreasng hgh levels of Fdi
nflows?
    After entry nto the WTo—wth the mplementaton of ts commtments and
broader and deeper lberalsaton n trade and nvestment—chna’s economy
has been growng rapdly. The average annual growth rate of chna’s GdP was


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                                                               Foreign direct investment in China



Fgure 11.1 FDI inflows into China, 1980–2006 (Us$ bllon at current prces)


                  70

                  60

                  50
    US$	billion




                  40

                  30

                  20

                  10

                  0
                  1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006



Source: Natonal Bureau of statstcs, varous ssues (a). China Statistical Yearbook, chna
statstcal Press, Bejng.




10 per cent durng 2002–06.1 chna’s foregn trade has been expandng even
more rapdly than ts overall economc growth. The total value of chna’s foregn
trade ncreased from Us$509.65 bllon n 2001 to Us$1,760.4 bllon n 2006,
wth an annual growth rate of 28.2 per cent. Undoubtedly, chna’s economy has
benefitted from entry nto the WTo, especally from a more open and lberalsed
nternatonal trade and Fdi regme.
    After chna’s accesson to the WTo, Fdi nflows presented an ncreasng
trend. Fdi nflows ncreased from Us$46.9 bllon n 2001 to Us$63 bllon
n 2006,2 wth an annual growth rate of 6.1 per cent (Fgure 11.1). Ths has
demonstrated that wth trade and nvestment lberalsaton and reducton
n foregn nvestment barrers, chna’s WTo accesson has accelerated Fdi
nflows.
    There has, however, long been an ssue of ‘round-trppng’ of nvestment n
chna. round-trppng s drven by dfferences n the treatment of foregn and
domestc nvestors, whch can motvate nvestors to channel funds out of, and
subsequently nto, an economy n the form of Fdi. Because the funds orgnate
n the host economy tself, round-trppng nflates Fdi nflows. in chna, because
of the preferental treatment offered to foregn nvestors (manly through tax


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China—Linking Markets for Growth


ncentves), a sgnficant share of Fdi nflows are round-trpped, manly va hong
kong (UNcTAd 2007) and, more recently and ncreasngly, va tax havens such
as the Vrgn, cayman and samoan slands (he 2006). offical estmates from
the chnese government are not avalable, but one estmate, made by harrold
and lall (1993), suggested that round-trppng nward Fdi accounted for 25 per
cent of chna’s Fdi nflows n 1992. some experts estmate that round-trppng
Fdi currently accounts for 33 per cent of chna’s total Fdi nflows (he 2006).
     on 16 march 2007, chnese lawmakers passed the much talked about
corporate ncome tax law, unfyng tax rates for foregn and domestc enterprses.
The new tax rate for domestc and foregn enterprses wll be 25 per cent. The
law s due to take effect on 1 January 2008 (Xnhua News Agency 2007). The new
law has unfied the two exstng tax codes—one for domestc enterprses, the
other for foregn-nvested enterprses—and represents a fundamental change
n chna’s tax polcy. many of the tax ncentves and tax holdays that exsted
n the old code for foregn nvestors have been changed or elmnated.
     Undoubtedly, the new law and the unficaton of the tax rate wll substantally
reduce the ncentve for round-trppng. What, however, are the mpacts of the
new tax law on domestc and foregn-nvested companes and on Fdi nflows
nto chna?
     Although the current nomnal ncome tax rate s set at 33 per cent, the real
average ncome tax burden on chna’s domestc companes s 25 per cent
(Xnhua News Agency 2007), so on average the new tax law wll not reduce the
real tax burden on domestc companes.
     The current real ncome tax burden on foregn-nvested companes s 15 per
cent (Xnhua News Agency 2007). on average, the new law wll ncrease the
tax burden on foregn-nvested companes by 10 percentage ponts. it seems
that the new law wll have a negatve mpact on foregn-nvested companes—
especally n the short term on small-scale, labour-ntensve, quck profit-earnng
enterprses from developng economes.
     i would argue, however, that chna’s proposed unfied corporate ncome
tax rate of 25 per cent for domestc and foregn-nvested companes wll have
lttle effect on foregn nvestment n chna, especally from large multnatonal
enterprses.
     Frst, the average corporate ncome tax rate for the 159 countres and regons
that levy corporate ncome tax s 28.6 per cent, and the average corporate
ncome tax rate for chna’s 18 neghbourng countres and regons s 26.7 per
cent (Xnwen shsh 2007). chna’s proposed unfied tax rate of 25 per cent s
below the global average, so t s qute compettve for attractng foregn and
domestc nvestment, therefore, there s lttle reason to beleve that the new
law wll have a sgnficant effect on foregn nvestment.


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                                                       Foreign direct investment in China


    second, n the past few decades, tme-seres econometrc analyses and
numerous surveys of nternatonal nvestors have shown that tax ncentves are
not the most nfluental factor for multnatonals when selectng nvestment
locatons (morsset 2003). Foregn nvestors are, of course, nterested n tax
rates, but they are more nterested n factors such as a broad nvestment clmate
and domestc market, the cost and avalablty of labour, basc nfrastructure,
economc and poltcal stablty, and the lke.
    Thrd, chna’s overall nvestment envronment s qute compettve, wth
relatvely efficent publc servces, good nfrastructure, a large and fast-growng
domestc market, abundant and well-educated human resources, low labour
costs and macroeconomc and poltcal stablty—makng chna one of the most
attractve locatons for Fdi. Accordng to the 2005 Foreign Direct Investment
Confidence Index (A.T. kearney inc. 2007), n 2005 chna was the world’s most
attractve Fdi locaton n the world. chna has mantaned ts lead n the ndex
for the fourth consecutve year. once agan, chna s the top Fdi locaton for
first-tme nvestors, wth more than half (55 per cent) of nvestors expected to
make first-tme nvestments there n the next three years. one n five Fdi dollars
for first-tme nvestments wll be commtted to the chnese market. chna has
successfully overcome the perceved rsk assocated wth first-tme market
entry, whch s typcally the bggest barrer to generatng new Fdi.
    Fourth, the new tax law stll has preferental stpulatons: chna wll contnue
to offer tax ncentves to nvestment n projects relatng to envronmental
protecton, agrcultural development, water conservaton, energy savng,
producton safety, hgh-technology development and publc welfare. hgh-
technology enterprses can stll enjoy a 15 per cent ncome tax rate, and small
and medum-szed enterprses wth slm profits are requred to pay ncome tax
at only 20 per cent. certan tax breaks wll also be granted to enterprses n
specal economc zones and n the less-developed western areas of the country
(Xnhua News Agency 2007).
    Fnally, the new tax law also provdes five-year transtonal perods to offset
the mpact on foregn companes. The ncome tax rate wll be ncreased gradually
to 25 per cent durng ths perod, and exstng foregn enterprses can stll enjoy
tax breaks wthn a regulated tme lmt (Xnhua News Agency 2007).
    Therefore, the new law wll brng chna’s tax laws more n lne wth
nternatonal standards. it s the fulfilment of a commtment to the WTo for
equal treatment for domestc and overseas nvestors. The change n the law
not only proves that the chnese government s determned to contnue ts
reform and openng up polces—and to work hard to mprove the nvestment
clmate—t wll help to create a sound nvestment envronment and promote
chna’s ndustral restructurng and upgradng.


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China—Linking Markets for Growth


The composition of FDI sources
By the end of 2001, Fdi n chna was domnated overwhelmngly by developng
economes, whch accounted for 73.8 per cent of the total accumulated Fdi
nflows, whle ndustralsed economes accounted for only 26.2 per cent. in
terms of ndvdual nvestors, Fdi was domnated by four nvestors: hong kong,
the Unted states, Japan and Tawan, accountng for 48 per cent, 8.7 per cent, 8.2
per cent and 7.3 per cent of the total accumulated Fdi nflows respectvely.
    After chna’s accesson nto the WTo, developng and ndustralsed
economes ncreased nvestments n chna. Fdi nflows from developng
economes ncreased from Us$32.2 bllon n 2001 to Us$39.8 bllon n 2005,
wth an annual growth rate of 5.4 per cent. Fdi nflows from ndustralsed
economes also ncreased but at a much slower pace, rsng from Us$13.6
bllon n 2001 to Us$14.4 bllon n 2005, wth an annual growth rate of 1.5 per
cent (Fgure 11.2).
    Among the major nvestors from developng economes, hong kong s stll
the largest; however, ts Fdi nflows nto chna stagnated at about Us$16–17
bllon from 2001 to 2005 (Table 11.1). As a result, ts share n total Fdi nflows nto
chna declned from 48.1 per cent at the end of 2001 to 32 per cent n the perod
2002–05. Fdi nflows from Tawan and sngapore ncreased n 2002 and then
declned contnuously. consequently, ther shares also declned n the perod
2002–05. in contrast, Fdi nflows from south korea ncreased dramatcally from
Us$2.1 bllon n 2001 to Us$4.6 bllon n 2005. As a result, ts share ncreased
from 3.1 per cent at the end of 2001 to 8.2 per cent n the perod 2002–05.
    The most notable feature s the large ncrease n Fdi nflows from three
tax-haven economes—the Vrgn, cayman and samoan slands. Fdi nflows
from the Vrgn islands ncreased dramatcally from Us$4.9 bllon n 2001 to
Us$8.1 bllon n 2005, an ncrease of 64.8 per cent. As a result, ts share n total
Fdi nflows ncreased from 4.4 per cent at the end of 2001 to 12.1 per cent n
the perod 2002–05, makng t the second largest nvestor n chna durng ths
perod. investments from the cayman and samoan slands also ncreased, as
dd ther shares n total Fdi nflows nto chna n the perod 2002–05.
    The large ncrease n Fdi nflows nto chna from the three tax-haven
sland economes mght nvolve ‘round-trppng’, as dscussed above, n whch
domestc chnese nvestors nvest n the tax-haven economes (often through a
shell company) and then renvest n chna to take advantage of the preferental
treatment offered to foregn nvestors.
    Another explanaton for the rse n Fdi nto chna from the Vrgn, cayman
and samoan slands s the ‘transt’ nvestment n chna from other economes—
notably hong kong and Tawan—va the sland economes n order to lower (or


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                                                                             Foreign direct investment in China



Fgure 11.2 FDI inflows into China, by source, 1983–2005 (Us$ bllon at
            constant 2000 prces)

                       45

                       40

                       35

                       30
         US$	billion




                       25

                       20

                       15

                       10                                                       Developing	economies
                                                                                Industrial	economies
                       5

                       0
                       1983   1985   1987 1989   1991   1993   1995   1997   1999 2001    2003   2005




Source: Natonal Bureau of statstcs, varous ssues (a). China Statistical Yearbook, chna
statstcal Press, Bejng.




elmnate) ther fiscal commtments. For example, the number of companes n
hong kong that are ncorporated n Bermuda and the cayman islands jumped
5.2 tmes from 178 n 1990 to 924 n 2000 (Wu et al. 2002). As for Tawanese
companes, partly to take advantage of the tax regme, but also to bypass the
Tawanese government’s restrctons on nvestment n the manland, the Vrgn
islands and the cayman islands rank second and thrd respectvely after chna
as the bggest recpents of Tawan’s outward nvestment (Bresln 2003). Ths
suggests that Fdi n chna from hong kong and Tawan s more sgnficant
than the offical data reveal. The data also reflect use of tax havens by nvestors
from ndustralsed economes.
    in terms of the major nvestors from ndustralsed economes, Fdi nflows
from the Unted states ncreased from Us$4.3 bllon n 2001 to Us$5.2 bllon
n 2002, then declned contnuously to Us$2.7 bllon n 2005. As a result, ts
share n total Fdi nflows nto chna declned from 8.7 per cent (makng t the
second largest nvestor) at the end of 2001 to 7.4 per cent (rankng t n fourth
place) n the perod 2002–05. investment from the Unted kngdom dropped
from Us$1 bllon n 2001 to about Us$0.8 bllon durng 2002 and 2005, whle
nvestment from France ncreased margnally durng the perod 2001–05. in


                                                         203
      Table 11.1      FDI inflows into China, 2001–2005 (Us$ at constant 2000 prces)


                                                       Fdi nflows (Us$ bllon)                             share of           share of       share of
                                                                                                          accumulated        accumulated    accumulated
                                                                                                           Fdi nflows        Fdi nflows    Fdi nflows
                                                                                                           (1983–2001)         (2002–05)     (1983–2005)
                                      2001          2002         2003          2004           2005           Per cent           Per cent       Per cent
      major nvestors from
      developng economes
                                                                                                                                                           China—Linking Markets for Growth




         hong kong                    16.3           17.1         16.7          17.4           16.1             48.1              32.0          42.7
         Tawan                        2.9            3.8          3.2           2.9            1.9              7.3               5.6           6.7
         sngapore                     2.1            2.2          1.9           1.8            2.0              4.7               3.8           4.4
         south korea                   2.1            2.6          4.2           5.7            4.7              3.1               8.2           4.8
         Vrgn islands                4.9            5.9          5.4           6.2            8.1              4.4              12.1           7.0




204
         cayman islands                1.0            1.1          0.8           1.9            1.8              0.6               2.6           1.3
         samoa                         0.5            0.8          0.9           1.0            1.2              0.4               1.9           0.9
      major nvestors from
      ndustralsed economes
         Japan                          4.3          4.0           4.8             5.0          5.9              8.2               9.3           8.6
         Unted states                  4.3          5.2           4.0             3.6          2.8              8.7               7.4           8.3
         Unted kngdom                 1.0          0.7           0.7             0.7          0.9              2.5               1.5           2.1
         Germany                        1.2          0.9           0.8             1.0          1.4              1.8               1.9           1.8
         France                         0.5          0.6           0.6             0.6          0.6              1.2               1.1           1.2
         Netherlands                    0.8          0.6           0.7             0.7          0.9              0.9               1.4           1.1
      others                            3.8          4.9           5.7             7.0          6.1              8.2              11.3           9.3
      developng economes            32.2          36.6          36.6          41.6           39.8             73.8              73.4         73.7
      industralsed economes        13.6          14.0          13.7          14.0           14.4             26.2              26.6         26.3
      Total                           45.8          50.6          50.3          55.6           54.2            100.0             100.0        100.0



      Source: Natonal Bureau of statstcs, varous ssues (a). China Statistical Yearbook, chna statstcal Press, Bejng.
                                                      Foreign direct investment in China


contrast, Fdi nflows from Japan ncreased from Us$4.25 bllon n 2001 to
Us$5.9 bllon n 2005, mantanng ts poston as the thrd largest nvestor n
chna n the perod 2002–05. investments from Germany and the Netherlands
also ncreased n 2005.
    Fdi nflows from other countres presented an ncreasng trend, rsng from
Us$3.8 bllon n 2001 to Us$6.1 bllon n 2005. As a result, ther combned share
n total Fdi nflows nto chna ncreased from 8.2 per cent at the end of 2001 to
11.25 per cent n the perod 2002–05. The ncreasng share of Fdi nflows from
other countres s an ndcaton of the dversficaton of Fdi sources.
    in general, snce chna’s WTo accesson, developng and ndustralsed
economes have ncreased ther nvestments n the chna because of the
overall mprovement of the nvestment envronment and the reducton of
trade and nvestment barrers. The growth rate of Fdi nflows from developng
economes s, however, much faster than that of ndustralsed economes. As
a result, developng economes stll domnate Fdi nflows nto chna, and the
composton of Fdi sources n terms of developng and ndustralsed economes
has barely changed.
    The domnaton of developng economes n Fdi n chna could be attrbuted
to ther economc development level and the nature and characterstcs of
ther firms. Because developng economes have moderate technologcal and
nnovatve capabltes and are at the md-level of economc development, the
ownershp advantages possessed by ther firms are concentrated n the forms
of labour-ntensve producton technology, standardsed product manufacturng
and well-establshed export market networks. obvously, chna—havng
relatvely abundant labour resources and a comparatve advantage n labour-
ntensve actvtes—s an attractve locaton for developng-economy nvestors
to explore overseas nvestment opportuntes, partcularly for export-orented
Fdi. snce ts accesson to the WTo, chna has, on the one hand, reduced
trade and nvestment barrers and mproved the nvestment envronment,
whle, on the other, ts export markets have been greatly enlarged as WTo
member countres—partcularly ndustralsed economes—have opened
domestc markets for chna’s exports. Therefore, there are great ncentves
for developng-country nvestors to ncrease Fdi n chna n general and to
ncrease export-orented Fdi n partcular. it s expected that chna wll reman
an mportant host country for nvestments from developng economes well
nto the future.
    in general, enterprses from ndustralsed economes wth hgh technologcal
and nnovatve capabltes and hgh overall economc development levels
wll possess greater ownershp advantages n the form of hgh technology,


                                       205
China—Linking Markets for Growth


product dfferentaton, manageral and entrepreneural sklls and ntangble
knowledge-based assets than those from developng economes. Because
of these enterprse-specfic ownershp advantages, Fdi from ndustralsed
economes s more market-orented than that from developng economes.
The general mplcaton s that host countres wth larger markets, faster
economc growth and a hgher degree of economc development wll attract
more market-orented Fdi. chna’s huge domestc market, fast economc growth
and ncreasng per capta ncome are very attractve to ndustralsed-country
nvestors, partcularly to market-orented Fdi. Therefore, chna’s accesson to
the WTo has provded great opportuntes for ndustralsed-country nvestors
to explore chna’s huge domestc markets. it s expected that wth fulfilment of
chna’s commtments to the WTo n trade and nvestment lberalsaton, chna
wll become an ncreasngly mportant host country for Fdi from ndustralsed
economes, whch wll not only ncrease the total Fdi nflows from ndustralsed
economes, t wll ncrease ther qualty.

Regional distribution of FDI inflows
snce chna started to attract Fdi, the regonal dstrbuton of Fdi nflows has
been very uneven. Fdi nflows nto chna are concentrated overwhelmngly
n the east of the country. Although there have been some small fluctuatons,
the gap between the eastern and the central and western regons has been
ncreasng, especally snce the early 1990s. By the end of 2001, the eastern
regon attracted 87.8 per cent of the total Fdi nflows nto chna, whle the
central and western regons receved only 9 per cent and 3.3 per cent of the
total respectvely.
    Trade and nvestment lberalsaton are expected to brng more benefits to
the eastern regon than to the rest of the country, especally the western regon.
Therefore, economc growth n the east wll be hgher and faster than n the west.
consequently, t s expected that more Fdi wll flow nto the eastern regon and
the uneven regonal dstrbuton of Fdi nflows nto chna—especally between
the eastern and the western regons—mght be renforced n the short term.
    After chna’s WTo entry, Fdi nflows contnued to concentrate n the eastern
regon—ncreasng rapdly from Us$39.8 bllon n 2001 to Us$48 bllon n 2004,
wth an annual growth rate of 6.5 per cent (Fgure 11.3 and Table 11.2). From 2002
to 2004, the eastern regon attracted Us$135.2 bllon n Fdi nflows, accountng
for 86.8 per cent of the total durng that perod. Among the provnces n the
eastern regon, Jangsu’s performance was the most outstandng. durng the
perod 2002–04, Jangsu attracted Us$27.9 bllon n Fdi nflows, accountng
for 17.9 per cent of the total. As a result, Jangsu surpassed Guangdong n


                                       206
                                                                     Foreign direct investment in China


attractng Fdi nflows and became the largest Fdi recpent n chna durng
the perod. Although ts share has been declnng, Guangdong s stll one of the
most attractve locatons for foregn nvestment. it attracted Us$27.4 bllon n
Fdi nflows, accountng for 17.6 per cent of the total durng the perod 2002–04.
laonng, shangha and Zhejang also wtnessed a large ncrease n Fdi nflows
and ther shares n the total have ncreased. in contrast, Fdi nflows nto Fujan,
Guangx and hanan have declned.
    The central regon has wtnessed a large ncrease n Fdi nflows snce 2001:
from Us$4.1 bllon n 2001 to Us$6.4 bllon n 2004, wth an annual growth rate
of 16.2 per cent. As a result, ts share n total Fdi nflows nto chna ncreased
from 9 per cent at the end of 2001 to 10.9 per cent n the perod 2002–04. in the
central regon, the ncreasngly attractve provnces for Fdi are Jangx, hube
and hunan. These three provnces contrbuted to the majorty of the ncrease
n Fdi nflows nto the central regon.
    The western regon has experenced a declnng trend n Fdi nflows snce
2001: from Us$1.4 bllon n 2001 to Us$1 bllon n 2004, wth an annual declnng
rate of 10.3 per cent. Provnces wth a large declne n Fdi nflows were schuan,
shaanx and Gansu.



Fgure 11.3 FDI inflows into China by region, 1983–2004 (Us$ bllon at
            constant 2000 prces)

                   60


                   50


                   40
     US$	billion




                   30

                                                                                         East
                   20                                                                    Central
                                                                                         West
                   10


                   0
                   1983   1985   1987   1989   1991   1993   1995   1997   1999   2001     2003




Sources: Natonal Bureau of statstcs, varous ssues (a). China Statistical Yearbook, chna
statstcal Press, Bejng.



                                                      207
      Table 11.2   FDI inflows into China by province, 1983–2004 (Us$ at constant 2000 prces)

                                          Fdi nflows                        share of          share of          share of
                                         (Us$ bllon)                    accumulated        accumulated      accumulated
                                                                           Fdi nflows        Fdi nflows      Fdi nflows
                          2001        2002          2003      2004         (1983–2001)         (2002–04)       (1983–2004)
                                                                           (per cent)            (per cent)    (per cent)
      eastern regon     39.77       44.03          43.09     48.03          87.76                86.83          87.50
       Bejng            1.73        1.66           2.06      2.35           4.17                  3.90          4.10
                                                                                                                             China—Linking Markets for Growth




       Tanjn            2.08        1.52           1.44      1.58           3.92                  2.92          3.65
       hebe              0.65        0.75           0.91      0.64           1.92                  1.48          1.80
       laonng           2.46        3.27           2.66      4.96           4.49                  7.00          5.18
       shangha           4.19        4.10           5.14      5.79           8.39                  9.66          8.74
       Jangsu            6.75        9.78           9.94      8.20          12.90                 17.94         14.28
       Zhejang           2.16        2.95           4.69      5.25           3.42                  8.28          4.75




208
       Fujan             3.83        3.68           2.44      1.76           9.67                  5.07          8.41
       shandong           3.44        4.54           5.66      7.94           6.41                 11.66          7.85
       Guangdong         11.65       10.88           7.36      9.18          28.78                 17.61         25.72
       Guangx            0.38        0.40           0.39      0.27           1.78                  0.68          1.48
       hanan             0.46        0.49           0.40      0.11           1.89                  0.64          1.55
      central regon      4.11        4.98           5.57      6.44           8.98                 10.91          9.51
       shanx             0.23        0.20           0.20      0.08           0.44                  0.31          0.41
       inner mongola     0.10        0.17           0.08      0.31           0.19                  0.36          0.24
       Jln              0.33        0.23           0.18      0.18           0.86                  0.38          0.72
       helongjang       0.33        0.34           0.30      0.31           1.08                  0.61          0.95
       Anhu              0.33        0.37           0.35      0.39           0.88                  0.71          0.83
       Jangx            0.39        1.04           1.52      1.87           0.80                  2.85          1.36
       henan              0.45        0.39           0.51      0.39           1.23                  0.82          1.12
       hube              1.16        1.37           1.48      1.60           1.94                  2.86          2.19
       hunan              0.79        0.86           0.96      1.30           1.56                  2.01          1.68
      Western regon            1.40            1.35            1.14            1.01                3.26                     2.26   2.99
       chongqng                0.25            0.19            0.25            0.23                0.70                     0.43   0.62
       schuan                  0.57            0.53            0.39            0.33                0.98                     0.81   0.93
       Guzhou                  0.03            0.04            0.04            0.06                0.13                     0.09   0.12
       Yunnan                   0.06            0.11            0.08            0.13                0.27                     0.20   0.25
       Tbet                       -               -               -               -                   -                        -      -
       shaanx                  0.34            0.35            0.31            0.13                0.89                     0.51   0.79
       Gansu                    0.07            0.06            0.02            0.03                0.14                     0.07   0.12
       Qngha                  0.04            0.05            0.02            0.00                0.01                     0.04   0.02
       Nngxa                  0.02            0.02            0.02            0.06                0.04                     0.06   0.04
       Xnjang                 0.02            0.02            0.01            0.04                0.10                     0.04   0.09
      Total                    45.28           50.36           49.80           55.48                 100                      100    100


      Source: Natonal Bureau of statstcs, varous ssues (a). China Statistical Yearbook, chna statstcal Press, Bejng.




209
                                                                                                                                           Foreign direct investment in China
China—Linking Markets for Growth


    it was hoped that chna’s accesson to the WTo would help to mprove
the uneven regonal dstrbuton of Fdi nflows, however, evdence has shown
that snce accesson, the pattern of regonal dstrbuton has been essentally
mantaned. The eastern regon s stll the most attractve for Fdi, the central
regon s ncreasng ts attractveness and the western regon stll has a long
way to go to mprove ts overall nvestment envronment.
    The attractveness of the eastern regon to Fdi s ts relatvely more open
and developed economy, closer connectons wth the outsde world, better
nfrastructure, hgher levels of scentfic research and techncal nnovaton
and the hgher qualty of ts labour forces. Therefore, t s expected that wth
further lberalsaton n trade and nvestment, the regon wll attract more Fdi
nflows.
    The poor performance of the western regon s attrbuted manly to ts
poor overall nvestment envronment. To boost economc growth and thereby
reduce the gap between the eastern and the central and western regons, the
chnese government launched the West development strategy n 1998.3 The
strategy emphasses nfrastructure development, envronmental protecton,
ndustral structural readjustment, development of scences and educaton
and economc reform and openness. To mprove the nvestment envronment
and accelerate economc growth n the western regon, chna has nvested
heavly n nfrastructure development. Accordng to the western development
strategy, major nfrastructure projects nclude, for example: nvestng 120 bllon
yuan n hghway and road constructon between 2000 and 2020; nvestng 100
bllon yuan n large and medum-szed ralway projects between 2000 and
2005; creatng a hydroelectrcty generaton base n the western regon and
constructng a natonal electrcty supply network to transport electrcty from
the west to the east, between 2000 and 2015; nvestng 300 bllon yuan n gas
ppelne constructon to transport natural gas from the west to the east, between
2000 and 2007; and constructng more arports n the western regon (office of
the West development leadng Group of the state councl 2000).
    Undoubtedly, the western development strategy and the further openng up
of the central and western regons have provded great opportuntes for foregn
nvestors. The comparatve advantages of the central and western regons are
rch natural resources, low labour costs and growng markets. in addton,
there are many state-owned enterprses n these regons wth huge amounts of
dle captal stock. chna s stpulatng relevant laws and regulatons on cross-
border mergers and acqustons and foregn nvestors are beng encouraged
to partcpate n state-owned enterprse reform and transformaton through
mergers and acqustons. such measures are amed at ncreasng the flow of


                                       210
                                                       Foreign direct investment in China


foregn captal nto the central and western regons n the medum and long
term. however, ths had not been manfested n drect foregn nvestment flows
nto the west up to 2004.

Sectoral distribution of FDI inflows
By the end of 2001, the sectoral dstrbuton of Fdi n chna was charactersed
by ts concentraton n the manufacturng sector, whch attracted 61 per cent of
the total Fdi nflows nto chna durng the perod 1997–2001; the servces sector
attracted 36 per cent, whle the prmary sector attracted only 3 per cent.4
    After WTo accesson Fdi nflows contnued to concentrate n the
manufacturng sector, ncreasng from Us$30.2 bllon n 2001 to Us$38.2
bllon n 2005, wth an annual growth of 6 per cent (Table 11.3). As a result, the
share of Fdi nflows nto the manufacturng sector ncreased from 66 per cent
n 2001 to 70 per cent n 2005.
    studes of the mpacts of chna’s WTo accesson predct that, after
accesson, chna’s labour-ntensve manufacturng ndustres—especally
textles and clothng—wll grow rapdly, led by the expanson of exports as a
result of the reducton of mport tarffs and the elmnaton of mport quotas
from ndustralsed economes on chna’s labour-ntensve manufactured goods.
To realse ths potental, however, chna needs to ntroduce foregn captal,
technology and advanced equpment to help upgrade ts relatvely backward
labour-ntensve ndustres n order to compete n global markets. Therefore,
WTo accesson provdes great opportuntes for foregn nvestors to nvest n
chna’s labour-ntensve and export-orented manufacturng ndustres. it s
expected that more Fdi wll flow nto these ndustres.
    chna’s accesson also provdes great opportuntes for foregn companes
to nvest n chna’s captal-ntensve and technology-ntensve manufacturng
ndustres. Foregn companes n these ndustres have advantages over chna’s
domestc enterprses. Wth further mplementaton of ts WTo commtments,
chna wll further relax controls on foregn ownershp, allow drect transactons
of cross-border mergers and acqustons by foregn companes of ts
enterprses—especally state-owned enterprses—and mprove the protecton
of ntellectual property rghts. As a result, t s expected that ncreasng amounts
of Fdi—especally from large ndustralsed-country multnatonals—wll
flow nto chna’s captal-ntensve and technology-ntensve manufacturng
ndustres.
    Fdi nflows nto the prmary sector contnued to declne after 2001: ther share
declned from 4 per cent n 2001 to only 2 per cent n 2005. Ths s not surprsng
gven the declnng share of the agrcultural sector n chna’s natonal economy


                                        211
      Table 11.3      FDI inflows into China by sector, 2001–2005 (Us$ bllon at constant 2000 prces)


                                 2001                        2002                      2003                          2004                       2005
      sector             Value      (per cent)       Value      (per cent)       Value    (per cent)         Value      (per cent)      Value      (per cent)
      Prmary             1.67          3.65          1.54         3.05           1.26       2.50             1.51         2.73          0.96         1.78
      manufacturng      30.18         65.93         35.32        69.77          34.75      69.03            39.43        70.95         38.16        70.37
      servcesa          13.93         30.42         13.76        27.18          14.33      28.47            14.63        26.32         15.10        27.85
      Total              45.78        100.00         50.62       100.00          50.33     100.00            55.58       100.00         54.22       100.00
                                                                                                                                                                China—Linking Markets for Growth




      aexcludng financal servces.
      Sources: calculated from Natonal Bureau of statstcs, varous ssues (a). China Statistical Yearbook, chna statstcal Press, Bejng; Natonal
      Bureau of statstcs, varous ssues (b). China Foreign Economic Statistical Yearbook, chna statstcal Press, Bejng.




212
                                                       Foreign direct investment in China


and the rapd loss of overall comparatve advantage n agrcultural producton
n chna (chen 2006). in addton, chna’s agrcultural land tenure system and
the tradtonal small-scale, famly-based agrcultural producton pattern have
greatly lmted the nflows of agrcultural Fdi wth large-scale producton and
advanced technology. Therefore, chna wll not attract large amounts of Fdi
nflows nto ts agrcultural sector wthout fundamentally changng ts land
tenure system and dramatcally reformng the tradtonal farmng pattern.
    it s expected that after accesson, more Fdi wll flow nto the servces sector,
however, such nflows have been ncreasng at a slow pace—from Us$13.9
bllon n 2001 to Us$15.1 bllon n 2005, wth an annual growth rate of only 2
per cent. Because of the slow growth rate, the share of Fdi nflows nto the
servces sector declned from 30 per cent n 2001 to 28 per cent n 2005.
    in the servces sector, n 2005, Fdi nflows concentrated manly n the
followng ndustres: real estate (32 per cent); leasng and busness servces
(22 per cent); transport, storage and postal servces (11 per cent); electrcty,
gas and water producton and supply (8 per cent); wholesale and retal trade
(6 per cent); and nformaton, computer servces and software (6 per cent).
Together, the above ndustres receved 86 per cent of total Fdi nflows nto
the servces sector.
    in 2005, chna for the first tme publshed the data for Fdi nflows nto ts
financal sector: they were Us$12.1 bllon n 2005 and Us$6.5 bllon n 2006. By
the end of 2005, 72 foregn banks from 12 countres and regons had establshed
254 operatonal nsttutons; 117 foregn banks from 40 countres and regons had
establshed 240 representatve offices n chna, and the total assets of foregn
banks ncreased to Us$87.7 bllon. There were 40 foregn-nvested nsurance
companes, and ther busness accounted for 7 per cent of chna’s nsurance
market (Zhang 2006).
    chna made substantal commtments to the WTo to open ts servces sector
to nternatonal trade and Fdi. however, t has taken a step-by-step approach to
mplementng these commtments. in most of the servces sectors—especally
n telecommuncatons, bankng and nsurance, wholesale and retal, storage
and transportaton—chna wll fulfil ts commtments n three to five years
after accesson.
    chna’s servces sector has been underdeveloped n the natonal economy.
The share of the servces sector n chna’s GdP has been about 30 per cent,
whle the global average s about 40 per cent. obvously, the slow development
of ths sector wll have a serous bottleneck effect on the overall development
of chna’s economy.




                                        213
China—Linking Markets for Growth


   There are many reasons for the slow development of chna’s servces
sector—two of the most mportant are the closed nature of the sector and
monopoly. Before chna’s WTo accesson, ts servces sector was relatvely
closed to foregn drect partcpaton, whch effectvely protected the state
monopoly. At present, many of chna’s servce ndustres are stll monopolsed
by state-owned enterprses, especally n finance and telecommuncatons.
   openng the servces sector has been one of the most mportant ssues
n the blateral negotatons for chna’s WTo accesson. chna has made
some mportant and concrete commtments n openng the sector to foregn
nvestors and t s expected that wth full mplementaton, t wll attract more
Fdi nflows.

Changes in FDI in the manufacturing sector
Fdi nflows nto chna have been drected overwhelmngly to the manufacturng
sector, and foregn-nvested firms have become a major part of ths sector. in
2005, foregn-nvested firms made up 22 per cent of manufacturng enterprses,
held 32 per cent of manufacturng assets, employed 32 per cent of the
manufacturng labour force and contrbuted 33 per cent of manufacturng
value-added.
   snce chna’s accesson to the WTo, foregn-nvested firms n the manu-
facturng sector have undergone rapd expanson and structural changes.

rapd expanson of foregn-nvested firms n the manufacturng sector
From 2001 to 2005, foregn-nvested firms n the manufacturng sector expanded
dramatcally. The total assets of these firms grew from 1,386 bllon yuan n
2001 to 2,952 bllon yuan n 2005—an ncrease of 113 per cent. compared wth
domestc firms—whose total assets ncreased by 50 per cent between 2001 and
2005—the growth of foregn-nvested firms was more than two tmes hgher
(Table 11.4).
    Among the three ndustry groups, from 2001 to 2005, the growth n total
assets of foregn-nvested firms was the hghest n technology-ntensve
ndustres5 —ncreasng 137 per cent—followed closely by captal-ntensve
ndustres,6 whch ncreased 125 per cent. Foregn-nvested firms’ total assets
n labour-ntensve ndustres7 ncreased by 81 per cent.
    From 2001 to 2005, the expanson of foregn-nvested firms was partcularly
sgnficant n furnture manufacturng (183 per cent), chemcal materals and
products (128 per cent), ferrous metal smeltng (297 per cent), non-ferrous
metal smeltng (193 per cent), general machnery (145 per cent), specal
machnery (206 per cent), transport equpment (134 per cent), electroncs and

                                      214
                                                               Foreign direct investment in China



Table 11.4     Total assets of foreign-invested and domestic firms in the
               manufacturing sector, 2001 and 2005 (bllon yuan n constant
               1991 prces)

industry                                              2001           2005     change (per cent)
Foregn-nvested firms
Food processng                                       40.3            85.3          112.0
Food manufacturng                                    38.1            59.4           56.1
Beverage manufacturng                                42.7            54.5           27.5
Tobacco processng                                     1.0             0.8          -20.0
Textles                                              73.8           145.9           97.7
clothng and other fibre products                     46.0            74.3           61.6
leather and fur products                              29.2            57.2           96.3
Tmber processng                                     15.0            19.7           31.2
Furnture manufacturng                               10.5            29.7          182.7
Paper and paper products                              52.8           104.6           98.0
Prntng                                              21.3            28.6           34.1
cultural, educatonal and sports goods                18.6            32.4           74.2
Petroleum refinng and cokng                         22.4            38.0           69.6
chemcal materals and products                       85.3           194.3          127.9
medcal and pharmaceutcal products                   31.9            59.4           86.5
chemcal fibres                                       18.3            36.9          101.8
rubber products                                       24.1            44.4           83.9
Plastc products                                      57.4           108.9           89.7
Non-metal mneral products                            71.0           112.0           57.8
Ferrous metal smeltng                                27.8           110.3          297.3
Non-ferrous metal smeltng                            16.9            49.7          193.4
metal products                                        61.3            89.3           45.5
General machnery                                     56.8           139.4          145.5
specal machnery                                     25.3            77.2          205.6
Transport equpment                                  117.5           274.9          133.9
electrcal machnery and equpment                    96.7           191.8           98.4
electroncs and telecommuncatons equpment         263.8           649.3          146.2
instruments and meters                                20.6            55.4          169.3
By ndustry group
   labour ntensve                                   506.6          915.6           80.7
   captal ntensve                                  384.6          863.8          124.6
   Technology ntensve                               494.9        1,172.6          136.9
   Total                                            1,386.2        2,951.9          113.0
domestc firms
  labour ntensve                                  1,104.9        1,713.7           55.1
  captal ntensve                                 2,052.2        2,997.7           46.1
  Technology ntensve                                985.3        1,487.7           51.0
  Total                                             4,142.3        6,199.2           49.7

Source: Natonal Bureau of statstcs, varous ssues (a). China Statistical Yearbook, chna
statstcal Press, Bejng.


                                              215
China—Linking Markets for Growth


telecommuncatons equpment (146 per cent), and nstruments and meters
(169 per cent), whch had an above-average rate of ncrease n total assets
(Table 11.4). it s nterestng to note that n the above nne ndustres, only one
(furnture manufacturng) s a labour-ntensve ndustry, whle the others are
captal and technology ntensve.

The relatve mportance of foregn-nvested firms n the manufacturng
sector
Because of the hgh growth rate n nvestment, foregn-nvested firms have
become ncreasngly mportant n the manufacturng sector. in terms of total
assets, the share of foregn-nvested firms n the manufacturng sector ncreased
from 25 per cent n 2001 to 32.3 per cent n 2005. in other words, one-thrd of
the total assets of chna’s manufacturng sector were held by foregn-nvested
firms n 2005.
    Among the three ndustry groups, foregn-nvested firms n technology-
ntensve ndustres ganed a greater share, and therefore, more mportance than
those n labour-ntensve and captal-ntensve ndustres n the manufacturng
sector. By 2005 the share of foregn-nvested firms n technology-ntensve
ndustres reached 44 per cent—ncreasng 11 percentage ponts over 2001
(Fgure 11.4). The share n labour-ntensve ndustres ncreased to 35 per cent n
2005—rsng by 3 percentage ponts compared wth 2001. The share n captal-
ntensve ndustres s stll relatvely low compared wth those n technology-
ntensve and labour-ntensve ndustres; however, t also ncreased—to 22 per
cent n 2005, rsng by 6.6 percentage ponts from 2001.
    Wth such rapd growth, foregn-nvested firms n some ndustres have
already ganed domnant or sgnfcant postons n the manufacturng
sector. Foregn-nvested firms have ganed a domnant poston n: leather
and fur products (58.5 per cent); furnture manufacturng (57.5 per cent);
cultural, educatonal and sports goods (63.7 per cent); and electroncs and
telecommuncatons equpment (71.9 per cent). The shares of foregn-nvested
firms have reached between 40 and 50 per cent of the ndustres’ total assets
n: clothng and other fibre products (46.6 per cent); paper and paper products
(44.9 per cent); rubber products (45.4 per cent); plastc products (49.1 per cent);
and nstruments and meters (49.7 per cent).

The structure of foregn-nvested firms n the manufacturng sector
emprcal studes have revealed that multnatonal enterprses, relatve to
ndgenous firms, tend to concentrate ther actvtes n sectors n whch the



                                       216
                                                               Foreign direct investment in China



Fgure 11.4 Share of foreign-invested firms in manufacturing,
            2001 and 2005 (per cent)

               50                               	
                    Labour	intensive
               45   Capital	intensive
                    Technology	intensive
               40
               35
               30
    Per	cent




               25
               20
               15
               10
               5
               0
                              2001                                    2005


Source: Natonal Bureau of statstcs, varous ssues (a). China Statistical Yearbook, chna
statstcal Press, Bejng.




revealed comparatve advantage ndex s greater than one, or s ncreasng over
tme (dunnng 1993)—n other words, n the ndustres n whch the country has
a comparatve advantage or the comparatve advantage s ncreasng.
    For developng economes, because they have a comparatve advantage
n labour-ntensve actvtes, nward Fdi flows usually concentrate n labour-
ntensve ndustres. in the case of chna, n the early stage of Fdi nflows
nto the manufacturng sector, foregn-nvested firms were concentrated
overwhelmngly n labour-ntensve ndustres. By the end of 1995, n terms of
the total assets of foregn-nvested firms n the manufacturng sector, 47 per
cent were n labour-ntensve ndustres, whle only 25 per cent and 27 per cent
were n captal-ntensve and technology-ntensve ndustres respectvely.
    Wth rapd economc growth, a hgh level of captal accumulaton,
mprovements n human captal development and technology progress, chna’s
comparatve advantage has changed rapdly. Though t stll has a strong
comparatve advantage n labour-ntensve actvtes due to ts huge populaton
and abundant labour supply, chna has greatly ncreased ts comparatve


                                              217
China—Linking Markets for Growth


advantages n captal-ntensve and technology-ntensve actvtes. As a result,
Fdi flows nto chna’s manufacturng sector have shfted gradually from a hgh
concentraton n labour-ntensve ndustres towards ncreasng nvestment n
captal-ntensve and technology-ntensve ndustres.
    By the end of 2001, the structure of foregn-nvested frms n the
manufacturng sector had changed. in terms of the total assets of such firms,
the share n labour-ntensve ndustres had fallen to 36 per cent, whle shares
n captal-ntensve and technology-ntensve ndustres had rsen to 28 per cent
and 36 per cent respectvely.
    snce chna’s accesson to the WTo, Fdi n ts manufacturng sector has
made even further and larger structural changes. Although a large amount of
Fdi stll flows nto labour-ntensve ndustres, the share of such ndustres n
the total assets of foregn-nvested firms has contnued to fall, whle shares of
captal-ntensve and technology-ntensve ndustres n the total assets have
been ncreasng. By the end of 2005, the nvestment structure of foregn-nvested
firms n chna’s manufacturng sector had changed fundamentally (Fgure 11.5).
Technology-ntensve ndustres have surpassed labour-ntensve ndustres and
become the most mportant and the largest sector n recevng Fdi. in terms
of the total assets of foregn-nvested firms, the share of technology-ntensve
ndustres has ncreased to 40 per cent, whle the share of labour-ntensve
ndustres has fallen to 31.02 per cent. captal-ntensve ndustres have also
ncreased ther mportance n recevng Fdi: the share has ncreased to 29.26
per cent of the total assets of foregn-nvested firms.
    in 2005, electroncs and telecommuncatons equpment ndustres attracted
the largest amount of Fdi, accountng for 22 per cent of the total assets of
foregn-nvested firms, followed by transport equpment (9 per cent); chemcal
materals and products (7 per cent); electrcal machnery and equpment (7 per
cent); and textles (5 per cent). Together, the above five ndustres held nearly
50 per cent of the total assets of foregn-nvested firms. it s worth notng that,
except for the textles ndustry, the other four ndustres are all captal and
technology ntensve.
    The above analyss reveals three mportant characterstcs of Fdi nflows
nto the manufacturng sector snce chna’s accesson to the WTo. Frst, such
nflows have ncreased sgnficantly. The growth rate of nvestment n the
total assets of foregn-nvested firms was more than twce as hgh as that of
domestc firms.
    second, although Fdi nflows nto all three ndustry groups n the
manufacturng sector ncreased dramatcally, the growth rates of Fdi nflows
nto technology-ntensve and captal-ntensve ndustres were much hgher


                                       218
                                                               Foreign direct investment in China



Fgure 11.5 Structural changes of foreign-invested firms in
            manufacturing, 1995, 2001 and 2005 (per cent)


                 50                                         Labour	intensive
                 45                                         Capital	intensive

                 40                                         Technology	intensive

                 35

                 30
      Per	cent




                 25

                 20

                 15

                 10

                 5

                 0
                        1995                        2001                    2005


Source: Natonal Bureau of statstcs, varous ssues (a). China Statistical Yearbook, chna
statstcal Press, Bejng.



than that nto labour-ntensve ndustres. As a result, the relatve mportance
of foregn-nvested firms n the three ndustry groups has changed: technology-
ntensve ndustres have surpassed labour-ntensve ndustres. in 2005,
foregn-nvested firms n technology-ntensve ndustres held 44 per cent of
the total assets, whle those n labour-ntensve ndustres held 35 per cent of
the total assets.
    Thrd, Fdi nflows nto the manufacturng sector have gradually changed
nvestment structures, shftng from a hgh concentraton n labour-ntensve
ndustres towards ncreasng nvestment n technology-ntensve and captal-
ntensve ndustres. As a result, the last two have become ncreasngly
mportant to Fdi, and, n 2005, ther combned share reached 69 per cent of the
total assets of foregn-nvested firms n the manufacturng sector.
    several factors could be attrbuted to the changng structure of Fdi n the
manufacturng sector. Frst, chna’s changng pattern of comparatve advantage
n ts economy has nfluenced the nvestment pattern. Although chna stll has
a strong comparatve advantage n labour-ntensve actvtes, t has greatly


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China—Linking Markets for Growth


ncreased ts comparatve advantages n captal-ntensve and technology-
ntensve actvtes. As foregn-nvested firms tend to nvest n the ndustres n
whch the host country has a comparatve advantage or n whch the advantage
s ncreasng, t s expected that chna’s ncreasng comparatve advantage n
captal-ntensve and technology-ntensve actvtes wll attract ncreasng Fdi
nflows nto these ndustres.
    second, through enterprse reform and ntense competton, chna’s domestc
firms have greatly mproved ther compettveness. in 2005, the labour productvty
of domestc firms n labour-ntensve ndustres had surpassed that of foregn-
nvested firms n the manufacturng sector.8 The ncreasng, fierce competton
from domestc firms n labour-ntensve ndustres has seen foregn-nvested
firms gradually losng compettveness n such ndustres, pushng Fdi towards
captal-ntensve and technology-ntensve ndustres, n whch foregn-nvested
firms have relatvely strong compettveness compared wth domestc firms.9
    Thrd, chna has greatly mproved ts busness envronment and strengthened
ntellectual property protecton, whch has ncreased the confidence of foregn
nvestors, encouragng them to brng more captal and technology through
ther nvestments.
    Fourth, ncreasng per capta ncome and the enlargement of chna’s
domestc market demand for hgh-qualty goods attract ncreasng numbers
of captal-ntensve and technology-ntensve multnatonal enterprses to
chna.

Conclusion
snce chna’s accesson to the WTo, wth the mplementaton of ts WTo
commtments and broader and deeper lberalsaton n trade and nvestment,
Fdi nflows nto chna have resumed an upward trend.
    developng and ndustralsed economes have ncreased ther nvestments
n chna. The growth rate of Fdi nflows from developng economes s, however,
much faster than that from ndustralsed economes. As a result, Fdi nflows
nto chna are stll domnated by developng economes and the composton of
Fdi sources has barely changed. The ncreasng share of Fdi nflows nto chna
from other countres s, however, a postve ndcaton of the dversficaton of
Fdi sources.
    it s expected that chna wll reman an mportant host country for
nvestments from developng economes nto the future. it s also expected
that wth further mplementaton of ts commtments to trade and nvestment
lberalsaton—partcularly n strengthenng ntellectual property rghts
protecton and openng more economc sectors, especally the servces sector,


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                                                       Foreign direct investment in China


to Fdi—chna wll become an ncreasngly mportant host country for Fdi
from ndustralsed economes, whch wll ncrease the total and the qualty
of Fdi nflows.
    snce chna’s accesson to the WTo Fdi nflows are stll concentrated
overwhelmngly n the eastern regon. Although there s an ncreasng trend of
Fdi nflows nto the central regon, nflows nto the western regon declned. The
poor performance of the western regon n attractng Fdi nflows s attrbuted
manly to ts poor nvestment envronment. Although the chnese government
has undertaken massve nvestment projects to mprove the overall nvestment
envronment n the west, the full effects wll take a long tme to materalse.
    it was expected that wth WTo accesson and the openng up of the servces
sector, more Fdi would flow nto ths sector. however, nflows have been
ncreasng at a very slow pace. chna made substantal commtments to the
WTo to open ts servces sector to nternatonal trade and Fdi, and has taken
a step-by-step approach to mplementaton. in most of the servces sectors,
chna wll fulfil ts commtments n three to five years after WTo accesson.
Therefore, t s unrealstc to expect that there wll be a large mmedate ncrease
n Fdi nflows nto chna’s servces sector. Wth further and full mplementaton
of ts commtments to the WTo, however, chna wll attract more Fdi nflows
nto the servces sector.
    After chna’s accesson nto the WTo, Fdi nflows contnued to concentrate
n the manufacturng sector. chna’s manufacturng s very compettve n
attractng Fdi nflows. it mantaned ts poston as the number one destnaton
for manufacturng and assembly n 2005 (A.T. kearney inc. 2007), and ths sector
wll contnue to attract large Fdi nflows.
    Wth the rapd ncrease n Fdi nflows nto manufacturng, foregn-nvested
firms n the sector have undergone some structural changes. Two changes are
most mportant. Frst, the growth rate of Fdi nflows nto technology-ntensve
and captal-ntensve ndustres was much hgher than that of Fdi nflows nto
labour-ntensve ndustres. As a result, the relatve mportance of foregn-
nvested firms n technology-ntensve ndustres has surpassed ther relatve
mportance n labour-ntensve ndustres n the manufacturng sector. second,
the nvestment pattern of foregn-nvested firms n manufacturng has been
changng gradually. Fdi nflows nto the manufacturng sector have shfted from
concentratng n labour-ntensve ndustres towards ncreasng nvestment n
technology-ntensve and captal-ntensve ndustres. As a result, the last two
have become ncreasngly mportant to Fdi.
    in 2007, chna passed the new corporate ncome tax law, whch wll take
effect on 1 January 2008. The new law unfied the tax rates for foregn and


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China—Linking Markets for Growth


domestc enterprses at 25 per cent. it wll brng chna’s tax laws closer to
nternatonal standards and s a fulfilment of commtments to the WTo for
equal treatment for domestc and overseas nvestors. Although meetng the
WTo commtments wll rase rates of taxaton on foregn enterprses, t s
not generally expected to have a sgnficant effect on Fdi n chna. its most
mportant effect wll be to reduce substantally the ncentves for round-trppng,
mprovng the quantty and qualty of Fdi nflows nto the country.

Notes
1   chna revsed ts GdP growth rate for the perod 1979–2004 n January 2006. The revsed rates
    for 2002, 2003 and 2004 were 9.1 per cent, 10 per cent and 10.1 per cent, respectvely, and the
    GdP growth rates n 2005 and 2006 were 9.9 per cent and 10.7 per cent respectvely.
2   The data are Fdi nflows nto non-financal sectors only. in 2005, chna for the first tme
    publshed the data for Fdi nflows nto ts financal sector: they were Us$12.1 bllon n 2005
    and Us$6.5 bllon n 2006.
3   Accordng to ths strategy, western areas nclude 12 provnces, muncpaltes and autonomous
    regons—schuan, chongqng, Guzhou, Yunnan, Gansu, shaanx, Qngha, Nngxa, Xnjang,
    Tbet, Guangx and inner mongola—as well as two prefectures—ensh of hube Provnce
    and Xangx of hunan Provnce.
4   data for real Fdi nflows by sector are not avalable before 1997.
5   Technology-ntensve ndustres nclude medcal and pharmaceutcal products; general
    machnery; specal machnery; electrcal machnery and equpment; electroncs and
    telecommuncatons equpment; and nstruments and meters.
6   captal-ntensve ndustres nclude beverage manufacturng; tobacco processng; paper and
    paper products; petroleum refinng and cokng; chemcal materals and products; chemcal
    fibres; ferrous metal smeltng; non-ferrous metal smeltng; and transport equpment.
7   labour-ntensve ndustres nclude food processng; food manufacturng; textles; clothng
    and other fibre products; leather and fur products; tmber processng; furnture manufacturng;
    prntng; cultural, educatonal and sports goods; rubber products; plastc products; non-metal
    mneral products; and metal products.
8   The rato of labour productvty of foregn-nvested firms to domestc firms n labour-ntensve
    ndustres n the manufacturng sector n 2005 was 0.93. calculated from China Statistical
    Yearbook 2006 (Natonal Bureau of statstcs, varous ssues [a]).
9   The rato of labour productvty of foregn-nvested firms to domestc firms n captal-ntensve
    and technology-ntensve ndustres n the manufacturng sector n 2005 was 1.58 and 1.43
    respectvely. calculated from China Statistical Yearbook 2006 (Natonal Bureau of statstcs,
    varous ssues [a]).




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                                                     Foreign direct investment in China


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